The conference operator welcomed everyone to Paramount Global's Second Quarter 2023 Earnings Conference Call and introduced Kristin Southey, Paramount Global's EVP, Investor Relations. Southey reminded listeners of the risks and uncertainties associated with forward-looking statements and noted that reconciliations of non-GAAP financial measures can be found in the Investor Relations section of the company's website. Bob Bakish, Paramount Global's President and CEO, then announced the agreement to sell Simon & Schuster to KKR for $1.62 billion and expressed excitement about the transaction.

Paramount is focused on building a sustainable business model, and they are doing this by creating high-quality content with mass appeal and monetizing it across multiple platforms and revenue streams. In the second quarter, they were the #2 in the industry in terms of total U.S. TV set viewership of their content across TV and streaming. They have an irreplaceable library of more than 200,000 TV episodes and 4,000 movies that is a critical driver of their business.

Paramount+ has production capabilities spanning the world and franchises like Transformers, Mission Impossible, Teenage Mutant Ninja Turtles, RuPaul, NCIS, FBI, Taylor Sheridan originals, Special Ops: Lioness, Chi, Billions, Yellowjackets, College Football, Big 10, March Madness, PGA, UEFA, NFL, and Nickelodeon, with more than 85 international scripted and unscripted originals already produced or green lit and 20 local versions of global unscripted formats slated to debut in the next few years.

Paramount+ is announcing a slate of international originals, including Korean and British series, to serve a large addressable market. The company is also focusing on being efficient and targeting key audiences. Despite the ongoing writer and actor strikes, Paramount+ has adjusted the CBS fall slate by leaning into the full power of Paramount's content capabilities, including shows from Paramount Network and Paramount+. This illustrates the strength of the company's global multi-platform asset base and strategy.

ViacomCBS is utilizing multiple platforms and revenue streams to monetize their content and maximize value. This includes subscription and advertising, as well as content licensing domestically and abroad. CBS content accounted for nearly half of minutes viewed on Paramount+ and $600 million of licensing revenue in the quarter. Paramount Pictures' library and films are key assets for driving acquisitions on Paramount+ in the U.S. ViacomCBS embraces the combination of streaming and strategic licensing to third-party platforms.

Paramount+ and Pluto TV have seen strong growth in digital ad revenue, driven by their content offerings and EyeQ, their digital ad platform. EyeQ now has a footprint of over 90 million full episode viewers domestically and is projected to generate $3 billion in revenue this year. They are also expanding their global Pluto TV footprint with a launch in Australia and launching ad-supported tiers of Paramount+ in certain international markets.

Paramount+ with Showtime integration is an example of Paramount's efforts to create a sustainable business model. This integration has allowed Paramount to secure cost savings, drive streaming ARPU, and create a stronger product for consumers that is more engaging with less churn. Data shows that customers of the bundle consumed over 40% more titles, indicating the success of the integrated product.

In the closing remarks, Bob expressed his pride in the company and team at Paramount, highlighting their strategy and approach to maximize their business. Naveen then discussed their Q2 results, focusing on four key areas: affiliate and subscription revenue, advertising trends, filmed entertainment results, and free cash flow. Paramount+ saw strong subscription revenue growth of 47%, largely driven by subscriber additions, ARPU improvements, and reductions in churn. It is expected that healthy levels of year-over-year affiliate and subscription revenue growth will continue.

Paramount+ growth is expected to be higher in the second half of the year, with Q3 net adds reflecting the loss of 1 million subscribers due to a legacy Latin American hard bundle deal. Year-over-year revenue performance improved 150 basis points compared to Q1, with D2C advertising growth accelerating to 21%. TV media advertising is recovering more slowly than digital, and Filmed Entertainment revenue and OIBDA were down year-over-year due to the comparison to Top Gun: Maverick and the timing and mix of other releases. Free cash flow was a use of $210 million in the quarter.

Paramount is taking steps to reduce their debt, including the sale of Simon & Schuster to KKR, which is expected to yield $1.3 billion in net proceeds. In 2024, they anticipate improved streaming economics through increased subscribers, higher ARPU, and more efficient investments in Paramount+. This will be accomplished through domestic price increases and new tiers and revised pricing in certain international markets.

This paragraph explains how ARPU can be increased through increased D2C penetration in Western Europe, Canada and Australia, as well as through enhanced ad monetization. EyeQ is generating digital advertising revenue of $3 billion, and ad-supported tiers of Paramount+ are being launched in certain markets. This is leading to rapid inventory expansion and growth in DTC advertising, as well as total viewing hours across Paramount+ and Pluto. This is important because it provides an alternative form of advertising for long-tail advertisers who have traditionally relied on social media and short-form video advertising.

Paramount+ has learned from its subscribers what content attracts and keeps them engaged, and has tailored its programming to better satisfy these audience segments. This has resulted in a 10 percentage point improvement in Paramount+'s content efficiency ratio, which is the service's content expense relative to its revenue.

Paramount is integrating Paramount+ with Showtime, and optimizing their programming and marketing strategies to drive the margin improvement they expect in D2C over the next several years. They are leveraging their O&O platforms to promote their content, and expect significant improvement in marketing spend as a percentage of revenue in 2024. They expect 2023 to be their peak year of D2C investment, and remain confident that their strategy will maximize earnings and create long-term growth and shareholder value. The company was asked about potential asset sales, including BET, and other companies have talked about possibly doing something with their sports portfolio and linear assets.

Bob Bakish discussed the strategic benefits of selling Simon & Schuster to KKR and the financial implications of the sale, such as reducing debt. He then mentioned that ViacomCBS is always looking for ways to maximize shareholder value, such as divesting, acquiring, or partnering on assets. Finally, Michael Morris of Guggenheim asked about ViacomCBS's direct-to-consumer business and the acceleration of their subscription revenue growth in the second quarter.

Bob Bakish believes in bundling as a way to create value in the media industry, and has already implemented different forms of bundling with Paramount+. He has bundled with Sky, Canal, and Walmart+, and is looking for other opportunities to bundle Paramount+ with other services. He does not have any specifics yet on partnerships or timing, but he knows that bundling will be a growing part of what they are doing.

Naveen Chopra explains that the ARPU growth in the second quarter of this year was due to a combination of improved subscriber mix, particularly in international markets, and growth in digital advertising. He also notes that there is seasonality in content expenses which is why '23 is expected to be peak losses. However, he expects to see significant earnings improvement in D2C as they move into next year, due to continued subscriber growth, ARPU growth, churn reduction, and getting more leverage on content investments.

Naveen Chopra discussed the drivers for the 20%+ ARPU growth expected for the next year, which include a full year of price increase, favorable subscriber mix in international markets, and growth in higher ARPU markets. He then answered Ben Swinburne's questions about cash content spending and elasticity or inelasticity of demand.

The company has seen encouraging data around engagement since they implemented a price increase, such as an increase in daily hours per subscriber. They are also optimistic about the net churn impact, but it is still too early to measure. To improve the efficiency of their content spend, they are leveraging content across platforms more, leaning into franchises, and using analytics to understand how to super serve key audience segments.

Bob Bakish responds to a question from Rich Greenfield of LightShed Partners about the balance between spending on sports and entertainment programming. Bakish explains that the recent changes in sports rights, such as the NBA, WWE, and College Football Playoffs, will not change their commitment to improving cash spend over a multiyear period of time. He also mentions that advertising is down 6% and will get better as the year progresses, and that Naveen will add information about Pluto.

CBS and Paramount+ have a strong partnership with the Big Ten and are looking forward to beginning the partnership in the fall. Sports are integral to their strategy, driving distribution, attracting viewers, enabling strong monetization in the ad market, and providing powerful promotion and schedule lead-ins. CBS and Paramount+ have broad and top-tier quality sports and their deals are locked in through the end of the decade, so they don't need or want to do anything incremental. They focus on maximizing the impact of the valuable rights they already have.

Naveen Chopra discussed the strong digital advertising revenue growth in the quarter, which was driven by Paramount+ and Pluto. He believes that the volume of engagement created by both platforms will enable a digital advertising opportunity in the future. Brett Feldman asked about churn initiatives, and Naveen discussed different types of subscriber cohorts and how their churn profile can be lower than the base. He mentioned that investors will be able to track the KPIs in the next year or so.

Naveen Chopra explains that sports viewers tend to have higher lifetime values than expected, as long as they are exposed to other forms of content. He also mentions that their churn initiatives are multi-dimensional, and involve programming content in a smart and thoughtful way to get subscribers to engage with additional titles.

Bob Bakish emphasizes that the success of Paramount+ lies in the combination of sports and entertainment, as evidenced by data that shows 40% more titles are consumed when Showtime and Paramount+ are combined. He believes that this combination helps lower churn, as well as ad monetization and subscriber acquisition, engagement, etc. Naveen adds that the strategy needs to be fine-tuned for viewers who watch NFL in the fall versus outside the fall.

Bob Bakish discussed the combination of cyclical and secular headwinds in the TV advertising landscape. He mentioned that rates are slightly decreasing and that they are focusing on the secular side by participating in the digital ad market. Direct digital is strong and programmatic is improving, and they expect this to continue. In Q3, they expect to see a slight improvement on a year-to-year basis, driven by D2C.

Naveen Chopra clarifies that the $600 million number referenced was just an indication of the contribution of CBS content to licensing in the quarter, not a timing benefit. He also explains that the timing benefit was related to the Filmed Entertainment segment, where some deals closed in Q2 rather than Q3. Bryan Kraft then asks how Paramount is thinking about its upcoming film releases for the remainder of the year and into 2025, in the event of a strike ending at the end of Q3.

Bob Bakish and Naveen Chopra discussed the potential impact of the strike on Paramount+ and the film fleet. They noted that a number of films have already completed production, including Killers of The Flower Moon, Bob Marley, John Krasinski’s IF, A Quiet Place Day One, and Dear Santa with Jack Black. They also noted that there may be some marketing challenges due to the strike, but they are working to mitigate the impact to consumers. They expressed hope that the strike would be resolved soon, so they can get back to producing content.

Paramount+ has a back half plan that includes shows like Special Ops: Lioness, NFL Football, the SEC and Big Ten, and theatrical movies like Transformers, Teenage Mutant Ninja Turtles, and PAW Patrol. There will be some original shows that will be delayed due to strike-related production delays, but they still feel good about their distribution plan and the slate in general. Bob Bakish emphasizes that they remain focused on executing their strategy, navigating the current environment, and creating shareholder value for the long-term.

This summary was generated with AI and may contain some inaccuracies.